Dysfunction has sucked Brussels dry of any foreign-policy power or relevance.

BY Anne Applebaum

It was born in the ashes of World War II and grew rapidly during Les Trente Glorieuses, the 30 years of economic development that followed that conflict. It then matured, expanded, and acquired both a currency and a good deal of respect. By the start of the 21st century, it was feted as a great symbol of international cooperation. But 2015 may well be remembered as the year when the institutions of the European Union began to fail — when the world, and even Europeans themselves, began to view the body as weak and incompetent.Ironically, the EU has been a victim of its own success. The founding aims of the European project were to bring peace to a continent devastated by war, create a common market, and reunify the continent’s east and west. By the early 1990s, those goals had been achieved. But half a century of peace and prosperity created complacency. Europe became so stable it decided that it didn’t need a foreign policy or a defense strategy of any gravity, that it could ignore or absorb the costs of its more irresponsible members’ financial mistakes, and that it didn’t need to worry about dysfunctional states to its south and east. Those decisions led directly or indirectly to some of 2015’s most memorable news stories: Greece’s economic and political crisis, the worst refugee emergency in 70 years, Russia’s intervention in Syria, the civil war in Syria, and of course the Paris terrorist attacks that Syria inspired.The EU’s problems are often blamed on what Margaret Thatcher once called its “airy-fairy” ambitions to be a United States of Europe. This year, however, it became clear that most of its failures are caused by EU countries’ refusal to pool resources and share sovereignty — to behave like an actual union or even a group of states with common economic and security interests.The euro crisis might have been avoided, for example, if the common currency’s members had decided to require the coordination of fiscal and banking policies before a new state could join. The eurozone would have had far fewer members, but Greece would have avoided bankruptcy and Spain, Portugal, and Italy would be in better condition too.Equally, Europe could have helped stem the refugee crisis if its leaders had decided — perhaps when they implemented the Schengen Agreement — to reinforce weaker borders, patrol the Mediterranean with a large and permanent force, and implement clear shared rules about political asylum that would be strict enough to discourage ineligible people from attempting dangerous journeys. Instead, member states were largely left to their own devices, and unacceptable burdens eventually fell on Italy, Greece, and more recently Hungary.Of course, refugees might not have poured into Europe at all had the EU decided earlier to make a genuine effort to promote political transitions in post-revolutionary Libya or pre-conflict Syria. This was impossible, however, because Europe has no means of projecting influence. In theory, it has its European External Action Service, a “foreign ministry” with diplomats and embassies. In practice, the job of the EU foreign minister has twice been filled by people with no international reputation or experience, who were then largely ignored. There have been a few EU successes, such as the almost totally unpublicized European naval operation that has put a stop to piracy off the Somali coast. But most of the time, the EU has waited until it was far too late to act, if it has acted at all. Only when the Syrian war came to Paris did the French suddenly realize that the Middle East isn’t as far away as they thought.Twenty years ago, when the United Kingdom and France still had real foreign-policy ambitions — and real armies — the absence of a joint decision-making forum mattered less. In crises, the larger countries could act together, or with the United States, if the EU could not. But now, France has its weakest president in recent memory, and Britain is focused on its own domestic issues. Meanwhile, despite being the continent’s clear economic leader, Germany finds it difficult for obvious historical reasons to speak too loudly or forcefully about anything that even hints at security policy.The result is a policy vacuum in Europe — one that Russia, long dismissed as irrelevant to the continent, is now eagerly seeking to fill. This is most obviously the case in Syria, where absent any coherent Western strategy, Putin has decided to defend President Bashar al-Assad. In Ukraine, the Kremlin promotes anti-European propaganda and uses military and economic tools to destabilize the government. Inside the EU, the Kremlin uses money and media to support Euroskeptic ideas or parties, throwing its financial support to the far right (Jobbik in Hungary, the National Front in France) and moral support to the far left (Syriza in Greece). And there is still no sound continent wide response to this interference.All this silence and inaction are strange because while no European state counts any longer as a first-league international power, the EU as a whole is the world’s largest and richest economy — a real partner for both the United States and China. If Europe’s leaders want to capitalize on that fact, reverse the disasters of 2015, exert real influence, and regain the respect of their own citizens, they must reinforce their institutions and promote their values in their immediate neighborhood. Indeed, if the EU even wants to maintain the peace and prosperity it has preserved for so long, it needs to become far more ambitious, both at home and abroad.Anne Applebaum (@anneapplebaum), author of the Pulitzer Prize-winning book Gulag: A History, is director of the Legatum Institute’s Transitions Forum. She also writes columns for the Washington Post and Slate.

Much of the fossil industry will go into slow run-off while the new plutocrats will be masters of post-carbon technology

By Ambrose Evans-Pritchard.

The authorities in Paris have banned any protest marches due to security concerns following the terrorist attacks, so campaigners have left their shoes out insteadPhoto: REUTERS/Eric GaillardA far-reaching deal on climate change in Paris over coming days promises to unleash a $30 trillion blitz of investment on new technology and renewable energy by 2040, creating vast riches for those in the vanguard and potentially lifting the global economy out of its slow-growth trap.

Economists at Barclays estimate that greenhouse gas pledges made by the US, the EU, China, India, and others for the COP-21 climate summit amount to an epic change in the allocation of capital and resources, with financial winners and losers to match.

By then crude consumption would fall to 72m barrels a day - half OPEC projections - and demand would be in precipitous decline. Most fossil companies would face run-off unless they could reinvent themselves as 21st Century post-carbon leaders, as Shell, Total, and Statoil are already doing.

The agreed UN goal is to cap the rise in global temperatures to 2 degrees centigrade above pre-industrial levels by 2100, deemed the safe limit if we are to pass on a world that is more or less recognisable. Climate negotiators say there will have to be drastic "decarbonisation" to bring this in sight, with negative net emissions by 2070 or soon after. This means that CO2 will have to be plucked from the air and buried, or absorbed by reforestation. Such a scenario would imply the near extinction of the coal industry unless there is a big push for carbon capture and storage. It also implies a near total switch to electric cars, rendering the internal combustion engine obsolete.

Effect of current Paris pledges

The Bank of England and the G20's Financial Stability Board aim to bring about a "soft landing" that protects investors and gives the fossil industry time to adapt by forcing it to confront the issue head on. Barclays said $21.5 trillion of investment in energy efficiency will be needed by 2040 under the current pledges, which cover 155 countries and 94pc of the global economy. It expects a further $8.5 trillion of spending on solar, wind, hydro, energy storage, and nuclear power. Those best-placed to profit in Europe are: Denmark's wind group Vestas; Schneider and ABB for motors and transmission; Legrand for low voltage equipment; Alstom and Siemens for rail efficiency; Philips, and Osram for LEDs and lighting.

But this is a minimalist scenario. While the Paris commitments suggest a watershed moment, they do not go far enough to meet the targets set by the Intergovernmental Panel on Climate Change (IPPC). The planet has already used up two-thirds of the allowable "carbon budget" of 2,900 gigatonnes (GT), and will have used up three quarters of the remaining 1,000 GT by 2030. Barclays advised clients to prepare for a more radical outcome, entailing almost $45 trillion of spending on different forms of decarbonisation. "The fact that COP-21 in itself is clearly not going to put the world on a 2 degree track does not mean that fossil-fuel companies can simply carry on with business-as-usual. We think they should be stress-testing their business models against a significant tightening of global climate policy over the next two decades," it said. The main enforcement tool would be a rise in carbon prices to an estimated $140 a tonne by 2040 - either in the form of a tax or an emissions trading scheme. The pincer coming from the other side would an assault on direct fossil fuel subsidies, estimated at $550bn a year by the International Energy Agency.

Michael Jacobs from the Global Commission on Energy and Climate said the Paris accord is an instrument of economic signalling. "It is telling markets and investors that there is a massive opportunity before them," he said. It is not yet certain that there will be a binding agreement. There could still be a dispute over the promised $100bn a year of mitigation funding for developing countries, though this issue is more symbolic than real when set against the trillions at stake. "It's peanuts," said Christiana Figueres, the UN's climate chief. The mood in Paris is radically different from the Copenhagen summit in 2009, poisoned by a 'North-South' split over who is responsible, and who should pay to clean up the greenhouse legacy.

"What has really changed everything is that the cost of renewables has come down so far: what looked impossible six years ago in Copenhagen is now possible," said Mark Lewis, the chief author of the Barclays report. Renewables made up half of all new power added worldwide last year. "The average cost of global solar was $400 a megawatt/hour worldwide in 2010. It fell to $130 in 2014, and now it has fallen below $60 in the best locations. Almost nobody could have imagined this six years ago," he said. Mr Lewis said the next big breakthrough - perhaps within five years - will be in cheap energy storage, conquering the curse of intermittency and accelerating an unstoppable snowball effect driven by market forces. The IEA expects solar and wind capacity to rise eightfold under a 2 degree trajectory.

The historic inflexion point was a deal by US President Barack Obama and China's Xi Jinping last year to push for radical curbs, entirely changing the character of global climate politics. "The two 800-pound gorillas are working together," says Todd Stern, the chief US climate negotiator. China has in effect switched sides since Copenhagen, no small matter for a country that now emits as much CO2 as the US and the EU combined. It has embraced green energy with the zeal of the converted, rushing to clean up its toxic cities and head off a middle-class revolt that threatens the legitimacy of the Communist regime. It will introduce a cap-and-trade system for emissions in 2017. The dirtiest coal plants are being shut down. Some 200 GW of solar capacity are to be installed by the end of the decade. President Xi Jinping has vowed to cap total CO2 emissions by 2030 - if not earlier. Mr Jacobs said a deal in Paris is highly likely. "You can never rule out a break-down. These meetings always go to the wire. But we have gone past the turning point in the US and China, and both countries have come to the realisation that it is possible to decarbonise without hurting economic growth," he said. It will not be a legally-binding treaty, but it is expected to have the same effect as each country transposes the targets into its own law. In the US it will be enforced through the legal mechanism of the Clean Air Act, anchored on earlier accords, without need for Senate ratification. The sums of money are colossal. Macro-economists say this is just what is needed to soak up the global savings glut and rescue the world from its 1930s liquidity trap. There might even be a boom.

MOST Brazilians, the opinion polls have reported for months, would be delighted to see the back of Dilma Rousseff, their president. After Eduardo Cunha, the Speaker of the lower house of Congress, set the impeachment of Ms Rousseff in motion on December 2nd, they may well get the chance. Though the talk had recently receded, impeachment has been discussed for months. Nevertheless, Mr Cunha’s move is flawed and threatens only to drag Brazil deeper into the mire.

An act of personal revenge

It is not hard to see why Ms Rousseff is so disliked. Little more than a year ago she narrowly won a second term by vowing to defend Brazilians’ jobs, living standards and welfare benefits from the evils of a “neoliberal” opposition. It was a false promise. Because of mismanagement and overspending in her first term, the economy is trapped in a sickening vortex: output in the third quarter was 4.5% lower than a year earlier, the real has lost a third of its value this year; the fiscal deficit is nearing 10% of GDP and inflation is heading for 10%. Unemployment has soared to 7.9%.Mainly because of the economy, Ms Rousseff is the most unpopular and ineffective president in modern Brazilian history. She lost control of Congress at the start of her second term; she has been unable to get the spending cuts and fiscal reforms needed to repair the economy. The audit tribunal rejected her government’s accounts for 2014, alleging that she hid the true state of government finances in an election year.Then there is a vast corruption scandal centred on Petrobras, the state-controlled oil giant. Prosecutors allege that, during the governments of Ms Rousseff and her predecessor, Luiz Inácio Lula da Silva, cartels of contractors paid huge bribes to politicians from the ruling Workers’ Party (PT) and its allies. Some of Brazil’s leading tycoons are in jail; more than 40 politicians are under investigation. The latest to be locked up on suspicion of wrong-doing—which they deny—are André Esteves, a billionaire investment banker, and Delcídio do Amaral, the government’s leader in the Senate.Although there is plenty to be unhappy about, Mr Cunha’s impeachment bid looks like an act of revenge. Prosecutors are investigating whether he took bribes to arrange contracts with Petrobras, which he denies. He acted just hours after three PT members on the lower house ethics committee said they would vote to remove him from Congress. The reason he gave for impeaching the president is that this year she continued the practices condemned by the audit tribunal. Ms Rousseff deserves to be punished for her fiscal irresponsibility, but this is a technicality. In a democracy, impeachment is the supreme weapon: it should have a solid legal and political basis.Ms Rousseff has vowed to fight back. She is not the one with Swiss bank accounts, she reminded Mr Cunha (his family’s, he says). The PT brands the impeachment “a coup”. That is wrong, but it heralds a divisive battle over the next few months. At present, there is no reason to believe that the opposition has the votes to remove the president. Next year that might change, especially if evidence emerges that ties Ms Rousseff personally to the wrongdoing at Petrobras, whose board she chaired in 2005-10 (none has so far).Impeachment is thus the ultimate distraction for a government that was already too distracted to govern. That bodes ill for the economy. Ms Rousseff deserved another few months to try to get a grip. Should she fail, there would be a strong case for persuading her to resign for the good of her country. By striking too soon and on the flimsiest of grounds, Mr Cunha may have given a weak and destructive president a longer lease of life.

The International Monetary Fund is expected to admit China’s renminbi to its elite basket of reserve currencies on Monday in what would be a major vote of confidence in Beijing’s economic reforms and its bid to internationalise its currency.

Confirming China’s place at the top table of the world’s economies, the IMF’s shareholders are set to vote overwhelmingly to include the renminbi as the fifth member of the basket used to value the fund’s own de facto currency, the “special drawing rights”.

The move comes at a crucial time for China, which is managing a significant slowdown in growth and has suffered deep falls in financial markets as questions have mounted over the leadership in Beijing’s response and commitment to reforms.

But Monday’s vote by the IMF’s board will also come amid questions over just how much the IMF has been forced to bend its own rules to make the case for the renminbi and accommodate China at a sensitive time in the relationship between the fund and Beijing.

“They are stretching their criteria,” said Edwin Truman, a former US Treasury official and longstanding watcher of the IMF at the Washington-based Peterson Institute for International Economics.

Eswar Prasad, a former head of the IMF’s China team, said that had the IMF review been applied to any other currency, the case would probably not have been made for inclusion in the SDR basket.

Becoming part of the SDR basket is largely symbolic, but membership is limited to easily traded large currencies that are widely used by central banks to hold foreign exchange reserves.

“It is very clear that [IMF staff and management] were willing not to break the rules but to bend them,” Mr Prasad said. “Given how much the IMF needs China they did not have much choice.”

With China the world’s largest economy, measured by purchasing power parity, the fund would lack global legitimacy without giving a leading role to Beijing. Several western diplomats in Beijing have said the renminbi’s inclusion in the SDR basket was a heavily political decision and that the Chinese government had been very effective at lobbying countries to support the inclusion regardless of whether the currency met the requirements or not.<strong>&amp;lt;div class="storyvideonojs"&amp;gt;&amp;lt;div&amp;gt;&amp;lt;p&amp;gt;You need JavaScript active on your browser in order to see this video.&amp;lt;/p&amp;gt;&amp;lt;img alt="No video" src="http://im.ft-static.com/m/img/logo/no_video.gif" /&amp;gt;&amp;lt;/div&amp;gt;&amp;lt;/div&amp;gt;</strong>

However, the IMF’s management insists that its review of the case for including the renminbi was purely “technical” in nature and focused on practical issues of whether the renminbi could be used in IMF transactions with its members.“There is no politics in this,” said a senior IMF official.IMF officials and major shareholders all argue that China’s pursuit of SDR inclusion has already delivered major reforms. If anything, they contend, the campaign has strengthened the hand of reformers within China and locked in important changes.

The IMF’s staff earlier this month recommended in a report to the fund’s board that the renminbi join the dollar, euro, British pound and Japanese yen in the SDR basket as part of a regular five-yearly review.

The staff’s findings hinged on the renminbi meeting two criteria. The first is that China and the renminbi have a significant role in global trade, a bar which Beijing passed years ago. But the second — that the renminbi be both widely used and “freely usable” internationally — has proved more contentious.In a number of the measures that ascertain how widely it is used — such as its use in central bank foreign exchange reserves and in international debt markets — the renminbi fell below the Australian and Canadian dollars, neither of which is a member of the SDR basket.

Moreover, some of the measures that China has introduced to make the renminbi “freely usable” for other IMF members — such as allowing access to its domestic bond market and giving the market a greater role in setting the daily trading range for the currency — have been introduced only in recent months and remain largely untested.Critics such as Mr Truman argue that the IMF has also made a series of concessions to China in recent months linked to the SDR decision that have been focused mainly on maintaining good relations with Beijing. That has proved particularly important at a time when China is frustrated with the stalling in the US Congress of 2010 reforms to the IMF’s shareholding structure and has begun creating alternative institutions to the fund and the World Bank. Among these IMF moves was a decision earlier this year to drop the categories of “advanced” and “emerging and developing” economies in its Composition of Official Foreign Exchange Reserves report after China began reporting its holdings to the IMF.

In a recent blog post, Mr Truman said the IMF had “kowtowed before an invisible emperor” with the move and undermined the goal of the project — to increase the transparency of global central bank reserves — by doing so.

The IMF says the Cofer data for individual countries had always been confidential and denies China received any special treatment. The move to drop the Cofer categories was made, it says, because China’s outsize role among emerging markets meant that releasing the category data would have disclosed otherwise confidential information about China’s reserves. IMF officials also argue that having China report the composition of its reserves to the IMF in itself was a “huge step forward”.

Justin SpittlerEasy money is fueling record car sales...U.S. car sales are on track to hit 18.3 million this month. It would be the most cars sold during any month this year. It would also be the first time in history that more than 18 million cars were sold in the U.S. for three months straight.The mainstream media thinks high car sales are proof the economy is getting stronger. In reality, car sales are high because people are borrowing at record rates to buy them…• Last quarter, the value of U.S. car loans grew by $39 billion...It was the 18th quarter in a row the car loan market grew.The value of U.S. car loans now tops $1 trillion for the first time ever. This means the car loan market is 47% larger than all U.S. credit card debt combined.• It’s never been easier to get a car loan...According to the Federal Reserve Bank of New York, lenders have approved 96.7% of car loan applicants this year. In 2013, they only approved 89.7% of loan applicants.It’s also never been cheaper to borrow. In 2007, the average rate for an auto loan was 7.8%. Today, it’s only 4.1%.Loose lending standards and cheap credit have encouraged more car buyers to take out loans.Nearly 86% of people who bought a new car during the second quarter took out a loan. Used car buyers borrowed 56% of the time.• Nearly half of all people who take out auto loans have shaky finances...Subprime loans make up 40% of the auto loan market. Subprime loans are made to people with poor credit history or no credit history at all. They’re riskier than loans to borrowers with good credit. That’s why they come with higher rates.Last week, The Wall Street Journal explained just how quickly the subprime market is growing.Over the six months through September, more than $110 billion of auto loans have been originated to borrowers with credit scores below 660, the bottom cutoff for having a credit score generally considered “good,” according to a report Thursday from the Federal Reserve Bank of New York. Of that sum, about $70 billion went to borrowers with credit scores below 620, scores that are considered “bad.”In other words, subprime loans made up 64% of new auto loans during the second and third quarters.• The Federal Reserve is helping to stoke the subprime auto market...In 2008, the Fed dropped its key interest rate to effectively zero and left it there. At the time, the U.S. economy was experiencing the worst economic downturn since the Great Depression. And the Fed wanted to boost borrowing and spending.The plan worked...Car buyers are borrowing as much as they can. The average loan for a new car purchase hit $28,524 during the second quarter, its highest level in five years.Consumers are also taking out loans with extra-long terms. The average term for a new car loan is now 67 months. For a used car, it’s 62 months. Both are all-time records.• An industry built on debt has a high risk of collapsing...People with large auto loans could struggle to pay their debts if the U.S. economy runs into trouble.Last month, Thomas Curry, U.S. Comptroller of the Currency, said today’s subprime auto loan market reminds him of the subprime mortgage market before the last financial crisis...During the last housing boom, lenders thought the housing market would stay hot indefinitely.So they loaned trillions of dollars to homebuyers with bad credit or no credit. As you likely know, housing prices eventually plummeted, triggering a wave of defaults and foreclosures. The mortgage market collapsed. And it almost sunk the entire global financial system.Today’s $1 trillion auto loan market isn’t nearly as big as the mortgage market during the last housing bubble. But it’s one of many bubbles that has created a dangerous investing environment.• Easy money policies have led to reckless borrowing and spending...During the past seven years of near-zero interest rates, Americans have borrowed trillions of dollars to buy cars, houses, commercial property, fine art, and just about everything else. Margin debt, which is money borrowed to buy stocks, hit an all-time record high earlier this year.Overall household borrowing hit $12.1 trillion last quarter. That’s its highest level in five years, according to the Federal Reserve Bank of New York.Even more concerning, debt levels have grown much faster than the overall economy. The Bank of International Settlements says U.S. household, corporate, and government debt jumped from 218% of gross domestic product in 2007 to 239% last year. Meanwhile, the real median U.S. household annual income has fallen from $57,795 in 2008 to $55,218 today...The Fed has created an “Alice in Wonderland” economy where almost no one asks, “Does it make sense to borrow this much money?”Instead they wonder, “How much can I get?”• Seven years of zero percent rates have already warped the economy...Yet, the Fed might launch an even more radical policy soon. Earlier this month, Fed chair Janet Yellen said negative interest rates are “on the table...if the economic outlook were to deteriorate in a significant way.” It would be the first time the Fed has ever used negative rates.Negative interest rates don’t make sense to most people. There’s good reason for that. The whole point of lending money is to earn interest.With negative rates, the lender pays the borrower. This means banks charge depositors for holding their money. This absurd arrangement is supposed to encourage borrowing and spending. Yellen has said the purpose of negative rates would be “to spur” lending.• The mainstream media mostly brushed off Yellen’s comments...However, negative rates in the U.S. are a real possibility. On November 21, John Williams, president of the Federal Reserve Bank of San Francisco, said the Fed should consider negative rates.Williams is one of the most closely watched Fed officials. He said negative rates would give the Fed more flexibility during the next crisis.We need to think more about whether going to negative interest rates gives us more room.When the U.S. economy runs into trouble again – and it will – the Fed will respond with a flood of easy money...With rates already near zero, there’s a good chance the Fed could drive its key rate below zero for the first time ever. This would punish savers, encourage more reckless borrowing and spending, and push the U.S. economy deeper into Wonderland.Chart of the DayA record number of people are borrowing to buy cars...Today’s chart shows the percentage of car buyers who took out a loan to buy a new car. As you can see, the figure has steadily gone up since the financial crisis.This year, 86% of new car buyers took out a loan. That’s up from 80% in 2010. It’s also an all-time high. Used car buyers are also borrowing like never before. About 56% of used car buyers have taken out loans this year, up from 47% five years ago.

I almost never do this, but I am posting here some remarks from another writer. My friend Andy Fately writes a daily commentary on the FX markets as part of his role at RBC as head of US corporate FX sales. In his remarks this morning, he summed up Yellen's speech from yesterday more adroitly than I ever could. I am including a couple of his paragraphs here, with his permission.

Yesterday, Janet Yellen helped cement the view that the Fed is going to raise rates at the next FOMC meeting with her speech to the Washington Economic Club.

Here was the key paragraph:

"However, we must also take into account the well-documented lags in the effects of monetary policy. Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability."

So after nearly seven years of zero interest rates and massive inflation in the size of the Fed balance sheet, the last five of which were in place after the end of the Financial Crisis induced recession, the Fed is now concerned about encouraging excessive risk-taking? Really? REALLY? That may be the most disingenuous statement ever made by a Fed Chair. Remember, the entire thesis of QE was that it would help encourage economic growth through the 'portfolio rebalancing channel', which was a fancy way of saying that if the Fed bought up all the available Treasuries and drove yields to historic lows, then other investors would be forced to buy either equities or lower rated debt thus enhancing capital flow toward business, and theoretically impelling growth higher. Of course, what we observed was a massive rally in the equity market that was based largely, if not entirely, on the financial engineering by companies issuing cheap debt and buying back their own shares. Capex and R&D spending have both lagged, and top-line growth at many companies remains hugely constrained. And the Fed has been the driver of this entire outcome. And now, suddenly, Yellen is concerned that there might be excessive risk-taking. Sheesh!

Like Andy, I have been skeptical that uber-dove Yellen would be willing to raise rates unless dragged kicking and screaming to that action. And, like Andy, I think the Chairman has let the market assume for too long that rates will rise this month to be able to postpone the action further. Unless something dramatic happens between now and the FOMC meeting this month, we should assume the Fed will raise rates. And then the dramatic stuff will happen afterwards.Actually I wouldn't normally expect much drama from a well-telegraphed move, but in an illiquid market made more illiquid by the calendar in the latter half of December, I would be cutting risk no matter which direction I was trading the market. I expect others will too, which itself might lead to some volatility.There is also the problem of an initial move of any kind after a long period of monetary policy quiescence. In February 1994, the Fed tightened to 3.25% after what was to that point a record period of inaction: nearly one and a half years of rates at 3%. In April 1994, Procter & Gamble reported a $102 million charge on a swap done with Bankers Trust - what some at the time said "may be the largest ever" swaps charge at a US industrial company. And later in 1994, in the largest municipal bankruptcy to that point, Orange County reported large losses on reverse repurchase agreements done with the Street. Robert Citron had seen easy money betting that rates wouldn't rise, and for a while they did not. Until they did. (It is sweetly sentimental to think of how the media called reverse repos "derivatives" and were up in arms about the leverage that this manager was allowed to deploy. Cute.)The point of that trip down memory lane is just this: telegraphed or not (it wasn't like the tightening in 1994 was a complete shocker), there will be some firms that are over-levered to the wrong outcome, or are betting on the tightening path being more gradual or less gradual than it will actually turn out to be. Once the Fed starts to raise rates, the tide will be going out and we will find out who has been swimming naked.And the lesson of history is that some risk-taker is always swimming naked.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.